Test case clarifies PBI endorsement criteria

A recent Federal Court decision (Test Case) has
displaced the previously accepted view that a charity's activities
must directly relieve poverty, sickness, suffering or
disability for the entity to be entitled to endorsement as a
'Public Benevolent Institution' (PBI). A PBI is a
sub-category of charitable institution that is eligible for the
full range of tax concessions available to registered charities. In
particular, PBI endorsement permits organisations to claim the much
coveted Fringe Benefits Tax (FBT) exemption.
FBT-exempt status enables an organisation to provide tax-effective
(and more competitive) remuneration packages to its employees.

The issue in question

Prior to the Test Case, the ATO was applying the law in a way
that made PBI endorsement contingent on the charity:

(a) effectuating a
purpose to 'relieve poverty, sickness, suffering or disability';
and

(b) providing
its services directly to people in need of relief.

However, underpinning this practice position was significant
ambiguity regarding whether the requirement to provide relief or
assistance directly was a legal requirement of PBI
endorsement.

The Test Case examined the 'direct relief' requirement in the
context of the applicant's appeal against the decision of the
Commissioner of Taxation to deny PBI status. The applicant is a
charity that engages principally in raising funds. It remits the
proceeds of its fundraising activities to its global partners for
the purpose of administering programs aimed at relieving poverty in
developing countries. Given the remoteness of the applicant's
fundraising activities and the ultimate relief of 'poverty,
sickness or disability', the essential question before the court
was: Does an organisation which carries out charitable activities
indirectly qualify as a PBI?

The 'direct relief' requirement

The phrase 'Public Benevolent Institution' first appeared in
legislation in the Estate Duty Assessment Act 1914 (Cth)
where it was used to replace the phrase 'charitable'. The
legislature introduced the phrase 'PBI' to take the place of
'charitable' in an attempt to move away from the legal meaning of
the word 'charitable' (which has a precise technical meaning) and
to import a term that was to be understood according to the
ordinary use of the term in the English language. The term 'Public
Benevolent Institution' is therefore not defined by the Fringe
Benefits Tax Assessment Act 1986 (Cth) and is given its
meaning by the common law.

Justice Perram acknowledged that the 'direct relief' requirement
was not clearly supported by case law and he considered that the
court in this case was not bound by precedent. His
Honour extended the High Court's position in the analogous case of
Commissioner of Taxation v Word Investments (2008) 236 CLR
204 (Word Investments), which concerned charitable
institutions. Word Investments held that an entity was not to be
prevented from being 'charitable' merely because it directed funds
to other charitable entities. His Honour held that the same
reasoning should apply to PBIs. Therefore, a PBI that is engaged in
charitable activities should not lose its PBI status if it decides
to divide its operations to include a fundraising arm. It follows
that an entity which is engaged principally in fundraising
activities will not automatically be denied PBI status.

Next steps

The Test Case is a decision of a single judge of the Federal
Court and may be subject to appeal. However, if the decision
stands, it effectively removes the 'direct relief' requirement that
has been vigorously applied by the ATO to date. Nevertheless,
fundraising entities seeking PBI endorsement must still ensure that
the funds raised by their activities are remitted to organisations
that directly relieve 'poverty, sickness or
disability'.

The decision is favourable for existing or prospective PBIs that
may be considering structuring their organisation to include a
'fundraising arm'. The decision also supports PBIs that intend to
form global partnerships or engage local agents to carry out their
charitable activities in countries outside Australia.